Microsoft Corporation (NASDAQ:MSFT) removed a major overhang affecting the company after announcing that its chief executive officer, Steve Ballmer will retire over the next twelve months. According to them, investors have been worried for years over Ballmer’s tenure and lack of succession plan.


Despite the announced forthcoming retirement of Ballmer, Raymond James analysts Michael Turits and James Wesman believe that Microsoft Corporation (NASDAQ:MSFT) financials remain uncertain around transition into low margin and higher capex devices and services. They also perceived a lack of stabilization in the PC market near-term. Because of these factors, the analysts advised investors to remain in the sidelines.

Microsoft will continue its “Devices and Services” strategy

Turits and Wesman speculated that Microsoft Corporation (NASDAQ:MSFT) will continue its “Devices and Services” strategy even after the departure Ballmer, based on the comments from the board.

Microsoft’s independent lead director, John Thompson stated that the board of the company remained “committed to the effective transformation of Microsoft to a successful devices and services company.”

According to the analysts, investors are still concern about the company’s commitment to devices given the poor performance of Microsoft’s tablets and phones. They emphasized that the right strategy for Microsoft Corporation (NASDAQ:MSFT) was to focus on cloud services, but it requires higher capex at $1.8 billion versus the estimated $1 billion in the fourth quarter.

The analysts projected that the guidance provided by Microsoft Corporation (NASDAQ:MSFT) regarding its business model transition during its upcoming financial analyst day might prompt Wall Street analysts to lower their earnings estimates for the company. Turits’ and Wesman’s current EPS estimate for Microsoft for the fiscal 2014 is $2.66 compared with the consensus estimate of $2.78.

Turits and Wesman opined that the strongest internal candidate to succeed Ballmer is Staya Nadella, EVP of Cloud and Enterprises Group. Nadella was successful in leading the implementation of the data center strategy of the company, which resulted to the strong launch of the Windows Server and Tools 2012 product line refresh as well as the Azure Infrastructure as a Service (IaaS) cloud service.

The analysts also opined that investors are hoping that the new CEO would be able to change the poor device strategy of Microsoft Corporation (NASDAQ:MSFT), to end from its $2.4 billion per year operating income losses from its Online division, and to evaluate the low margin of the Xbox EDD division. Turits and Wesman also believe that investors are hoping for higher dividend payout and shares buyback.

On the other hand, Analysts at BMO Capital Markets also believe that Nadella is the strongest internal candidate. According to them, he would likely be a “tweak the model” leader. They also speculated that Nadella might push Microsoft Corporation (NASDAQ:MSFT) to focus into cloud computing.

The analysts believe that a possible candidate outside Microsoft is Paul Maritz, former CEO of VMWare, Inc (NYSE:VMW).